The tax filing deadline is on the way, but never fear; there’s still time to take advantage of some moves that can help lower your 2018 taxes and keep more money in your wallet. Whether you’re trying to pay less or would like a bigger refund, these are some sure-fire ways to reduce your tax liability provided you qualify.
1. Deduct State and Local Sales Taxes
Taxes vary quite a bit depending on where you live. If you live in certain states, you may owe very little personal income, state, or local taxes. If this is your situation, never fear; if your itemized deductions exceed your allowable standard deduction you may be able to deduct state sales tax, including sales tax on major purchases made in 2018. This includes vehicle purchases (including RVs, motorcycles, and ATVs), boats, aircraft, or major home improvements.
If you qualify to utilize this option, there are several ways to calculate your allowable sales tax:
- Adding up the sales tax amounts using your receipts from 2018
- Use the IRS table to determine the sales tax owed based on your income, family size, and state of residence
- Use the IRS Sales Tax Deduction calculator
You’re allowed to deduct the larger of these amounts, but it’s important to remember that your deductions for all state and local taxes (which includes property, sales, and income taxes) are limited to $10,000 for most households or $5,000 for married couples who are filing separate returns.
2. Claim Itemized Deductions from Medical Costs
If you chose to itemize deductions for 2018, you may be able to deduct qualifying medical expenses. This can include things like dental care, medical expenses, and premiums for private health insurance coverage or Medicare. Medical expense deduction is only an option if your total qualifying medical expenses exceed 7.5% of your adjusted gross income (AGI) for the 2018 tax year. This is expected to change for the 2019 tax year when the deduction threshold is set to increase to 10% of AGI. You’re not able to deduct expenses that you paid for using a health savings account, as funds in these accounts come from pretax dollars.
If you’re self-employed or an S corporation shareholder-employee, you’ll most likely be able to claim an above-the-line deduction for your healthcare premiums.
3. Make a Deductible HSA Contribution
HSAs offer a great way to grow your health fund while also getting last-minute tax breaks. If you had qualifying high-deductible health insurance coverage last year, you can make a deductible contribution to a Health Savings Account (HSA) of up to $3,450 for individual coverage or up to $6,900 for family coverage. Wondering what qualifies as a high deductible policy? For the 2018 tax year, it’s defined as a policy with a deductible of at least $1,350 for individual coverage or $2,700 for family coverage.
You can take this deduction even if you’re not itemizing your deductions; unlike other types of deductions, it’s not dependent on income level. So, no matter how much money your household made in 2018, you can still contribute to your HSA if you meet the high deductible and other eligibility requirements.
If you’re eligible to make an HSA contribution for last year, you still have time. The deadline to open your account and make a contribution is April 15, 2019, for most states. For Massachusetts or Maine residents, the deadline is April 17 due to local holidays.
4. Make a Deductible IRA Contribution
An individual retirement account (IRA) is a personal savings account that helps you save for retirement – and may reduce how much you owe on taxes. If your 2018 earned income is the same amount or more than your IRA contributions for the 2018 tax year, you can make contributions to the account up until April 15th – and still claim the deduction. The yearly contribution limit is up to $5,500 for those qualifying taxpayers (and their spouses) under 50 years old. For those who were 50 or older by December 31st, 2018, the annual contribution limit is $6,500. Both you and your spouse can contribute income to the IRA account.
It’s important to note that deductible IRA contributions are limited by things like your income level and whether you participated in tax-favored retirement plans in 2018. Be sure to read up on the “Ground Rules for Deductible IRA Contributions to make sure you qualify.
5. Make Charitable Donations from Your IRA to Replace Taxable RMDs
For those who are 70½ or older, you may want to consider making a cash donation to an IRS-approved charity from your IRA. While this won’t allow you to claim itemized deductions for qualified charitable distributions (QCDs), you won’t be taxed on them either. You can take advantage of this strategy even if you inherited the IRA from a deceased account owner, as long as you meet the age requirement.
The limit on total QCDs is $100,000 each year, however, if you and your spouse have individual IRA accounts under your respective names, you’re each allowed to a $100,000 annual QCD limit. QCDs taken from traditional IRA accounts count as distributions for the required minimum distribution (RDM) rules so you can donate the total or a portion of your annual RMD account (up to $100,000) that you’d need to receive and pay taxes on.
If you did take your first RMD on or prior to April 1, 2019, you’re required to take a second RMD for the 2019 tax year before December 31, 2019, meaning you’ll have to take two taxable RMDs this year to meet your 2018 and 2019 obligations. Using this QCD strategy will allow you to replace taxed RMDs with tax-free QCDs.
If you turned 70 ½ at some point last year but didn’t take your initial IRA RMD, you can still use this benefit. While the deadline was April 1st, you can still choose this option with a 50% penalty on any shortfall.
Act Quickly – Tax Filing Deadline is April 15!
With the tax filing deadline quickly approaching, it’s important to take advantage of these last-minute tax-saving strategies as soon as possible! Contact your tax advisor today to discuss which one of these last-minute tax-break strategies would be best for you.